Third-Party Credit Guarantees and the Cost of Debt: Evidence from Corporate Loans

Abstract Using a comprehensive dataset collected by the Federal Reserve, I find that over one-third of corporate loans issued by US banks are fully guaranteed by legal entities separate from borrowing firms. Using an empirical strategy that accounts for time-varying firm and lender effects, I find t...

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Veröffentlicht in:Review of Finance 2022-03, Vol.26 (2), p.287-317
1. Verfasser: Beyhaghi, Mehdi
Format: Artikel
Sprache:eng
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Zusammenfassung:Abstract Using a comprehensive dataset collected by the Federal Reserve, I find that over one-third of corporate loans issued by US banks are fully guaranteed by legal entities separate from borrowing firms. Using an empirical strategy that accounts for time-varying firm and lender effects, I find that the existence of a third-party credit guarantee is negatively related to loan risk, loan rate, and loan delinquency. Third-party credit guarantees alleviate the effect of collateral constraints in credit market. Firms (particularly smaller firms) that experience a negative shock to their asset values are less likely to use collateral and more likely to use credit guarantees in new borrowings.
ISSN:1572-3097
1573-692X
1875-824X
DOI:10.1093/rof/rfab012